Types of Goodwill
There are two types of goodwill, purchase goodwill and self generated goodwill. The definition of these two are discussed as under :
(i) Purchased Goodwill
Purchased goodwill arises, when one business is taken over by another business, and the price paid by acquirer i.e.,purchase consideration, is more than the net assets (value) acquired in the business purchased. Such excess of purchase consideration over the net assets value is known as purchased goodwill.
Purchased Goodwill = Purchase Consideration – Net Assets
For example, if the Assets of the company are Rs. 10,000and the net asset And the liabilities of the company are Rs. 5,000, the net assets of the company will be Rs. 5,000 (Rs. 10,000-Rs. 5,000). If a Buyer pays Rs. 15,000 for the company as purchase consideration, the difference between the Purchase consideration of Rs. 15,000 , and the net asset value of Rs. 5,000, i.e Rs. 10,000, would be the value of the Purchase goodwill.
(ii) Self Generated Goodwill:
Self Generated Goodwill arises from business attributes like efficient management, favourable location, quality etc.of the company or firm. It is internally generateddue to the positive factors,which have also been discussed above and no payment is made to any external partyTowards suchgoodwill.
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